When it comes to earning an income, dividend investing has always been an unusual choice. Earlier generations favored this form of investing due to its higher yields back then. However, there are several benefits to this form of investing, especially with the right strategy. Additionally it is also important to choose the best dividend paying stocks in India.
But what exactly is dividend investing?
What Is Dividend Investing?
When a publicly traded company generates profits, it can utilize the proceeds in three ways. They could either reroute the funds into research and development or further save the funds for other future uses. The third option is to share the profits to shareholders as dividend payments.
But how will you, as an investor, receive this dividend? Buy purchasing stocks that pay dividends or ‘dividend investing’, you will get a share of the company’s ‘profits’ or dividends yields.
The dividend yield, expressed as a percentage, is a financial ratio. It indicated how much a company pays out in dividends each year relative to its stock price. Most companies pay dividends every quarter or four times a year. However, dividend payout frequency may differ from company to company. Some companies may pay semi-annually or every six months. They may also pay annually or no set schedule which is irregular dividends.
The payout ratio is a financial metric showing the proportion of earnings a company pays. It offers the payout in the form of dividends, expressed as a percentage of the company’s total earnings.
Dividend investing utilizes a strategy that provides investors two sources of potential profit.
This provides a probable income earned through regular dividend payments, and capital appreciation.
There are several types of dividends which include the following:
1. Cash dividend: This is the most popular form of payout. Cash is directly deposited into the bank accounts of shareholders. This is done in a predefined process and through dividend declaration.
2. Stock dividend: In this option, the company will issue additional shares to the stockholders.
3. Property dividend: This refers to the dividend paid to investors in the form of assets. This can include the company’s products or even real estate.
4. Scrip dividend: This dividend that issued here is new shares of the issuer’s stock, instead of a dividend. This essentially creates a note payable.
5. Liquidating dividend: The original capital invested is returned as a ‘liquid dividend’. This normally occurs when the company intends to wrap their business.
If you are an investor looking for an income through stocks, it is imperative that you look at company history. This will provide you with data that indicated a declaration of high dividend yield stocks in India.
Not only purchasing the right dividends, but best dividend paying stocks in India can reward you over time. However, you must make smart purchasing choices.
How to do dividend investing in India?
In India, several stock options have been typically high dividend stocks The best way to go about it, is to check the ‘dividend yield ratio’.
Dividend Yield Ratio = Dividend Per Share/Market Value Per Share.
This helps in understanding how much dividend a company pays out each year relative to its stock price. This is important since it can allow you to compare companies with respect to their dividend-paying capability.
But while there may be top dividend-paying stocks in India, this should not be the only reason why you are choosing to invest in them. At times, companies have also given dividends when they have been enduring losses. Additionally, there are several other hosts of other factors you need to consider before investing. This includes profit history, business outreach, debt conditions, management quality etc.
You will need to be prepared to invest considerable time to research the highest dividend paying stocks in India before you can make a long term investment decision.
To begin investing in the top dividend paying stocks in India, you first need to have a demat and trading account. You would also need to register with a stockbroker or brokerage firm. You will also need to ensure that your broker or brokerage of choice is registered with market regulator SEBI and or in either of the stock exchange market options in India. Two of the popular stock exchanges in India are the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
After registering, you can then choose the companies registered on the stock market, to invest in. when choosing the companies based on dividend options keep the following pointers in mind:
· What the dividend yield ratio tells you: A very high payout or yield ratio would indicate that very less profits are being reinvested. It would mean that the company is diverting lesser profit for reinvestment back into the business and more for dividend payouts.
· Analyzing dividends: These rations should not solely influence your decision to invest in a company’s stock. After all, the best dividend stocks in India can turn out to be a bad investments in the future.
· Do not look at absolute dividend numbers: Instead of looking at the numbers from a decision-making point of you, consider other factors. This would include the company’s earnings, the number of outstanding shares, shareholders and other metrics, which is where this ratio comes into play.
High Dividend Paying Stocks in India
Some of the top dividend paying stocks in India include the following:
|Company Name||NSE Symbol||CMP (As on 15th June, 2021)||Rating||Industry|
|Bajaj Auto||BAJAJ-AUTO||4138.05||4.5||2/3 Wheelers|
|Hero Motocorp||HEROMOTOCO||3007.85||4||2/3 Wheelers|
|REC||RECLTD||156.4||4||Finance (including NBFCs)|
|Oil India||OIL||148.95||0.5||Exploration & Production|
|Mphasis||MPHASIS||2069.3||3||IT Consulting & Software|
|VST Industries||VSTIND||3464.05||5||Cigarettes,Tobacco Products|
What are the pros and cons of dividend invest?
The investment market comes with both risks and benefits, and this is no different when investing in dividend yield stocks. But before investing in this option, you will need to consider the pros and cons of dividend investing:
· Passive income stream: With the right high dividend paying stocks in India, especially ones that offer cash payouts, you can earn a consistent stream of income with almost little to no effort, as compared to a bank account or deposit options.
· Reinvest dividend: You can reinvest your dividends by purchasing more shares of a company’s stock. This will go a long way to generate regular dividend distribution which can be used to acquire other equities.
· Limited capital gains: Dividend stocks do not result in capital gains for investors, especially for short term investment. This is because the unit stock values of large-cap firms do not fluctuate much with stock market volatility.
· Expensive dividend stocks: Large-cap enterprises often issue shares that is connected with regular dividend pay outs, resulting in securities that have a high value. Moreover, these shares, once held, may not be sold for a considerable time.
· Dividend Cuts: In this worst case scenario, companies may choose to reduce dividends at any time, which can result in a further drop of value in the future.
Things to consider for selecting the best dividend stocks to buy
When it comes to investing top dividend paying stocks in India, it is not something that should be done impulsively, or taken lightly. The strategy involved necessitates a significant amount of time and research, especially since it carries the same risks as other types of investment. However, understanding the benefits and drawbacks of dividend investing is a solid starting point for determining whether this choice of stock market investing is suited for you. You would need to consider whether you are investing for a short term payout, or a long term investing before you can even invest in high dividend yield stocks.
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In the end, before attempting to use them as part of your investment portfolio strategy, you should familiarise yourself with both the benefits and drawbacks of dividend investing.